$2.1 trillion in tax cuts: Bush, Congress make a huge gamble.

Byline: The Register-Guard

Congress approved a $330 billion tax cut Friday, and hours later the Senate voted to raise the nation's debt limit by nearly $1 trillion. Seldom has there been a more vivid demonstration of credit-card government. Congress, following President Bush's lead, has committed the nation to an economic policy that entails huge risks.

The $330 billion price tag on the tax-cut legislation is deceptive. To keep the number as low as possible, House and Senate negotiators agreed to make many of the tax reductions temporary - including a break for married couples, set to expire next near, and a reduction in taxes on stock dividends and capital gains, which will sunset after 2008. It's all but certain that these tax cuts will be made permanent, and if that occurs the 10-year cost of the legislation approved Friday will be more than $800 billion.

An $800 billion tax cut, together with the $1.3 trillion tax cut approved two years ago, would bring tax cuts during the Bush administration to a total of $2.1 trillion. The tax-cutting policy is being pursued at a time when this year's federal budget deficit is expected to reach $400 billion, a record. In Washington, D.C., tax cuts are both sunscreen and umbrella - the favored response to any kind of economic weather, fair or foul.

The Bush administration advocated the initial $1.3 trillion tax cut on grounds that a strong economy and the prospect of budget surpluses meant that taxpayers should keep more of their money. The economy began to weaken while the tax cut was being debated, and the proposal began to be promoted for its stimulative effect. The latest tax cut is presented almost entirely as a means of kick-starting the economy. The plan approved by Congress contains 33 percent more immediate stimulus than Bush proposed, with $61 billion coming in the current fiscal year and $149 billion in 2004.

The tax cuts may indeed have a stimulative effect - though if lower taxes succeed in bringing employment to 1.4 million Americans, as President Bush has claimed, the cost during the first two years alone would be $150,000 per job.

But the most devout believers in the efficacy of tax cuts do not limit their arguments to claims of stimulative effects. The true acolytes believe tax cuts cause economic growth, and ultimately lead to smaller deficits. They say it doesn't matter that most of the relief flows to people with high incomes - they're the ones who carry most of the burden of taxation, so it's both fair and unavoidable that they would receive most of the benefits.

Indeed, tax-cut defenders justify lower taxes on the richest people and companies as a means of encouraging people and companies to seek income and make investments. Supporters point to tax cuts enacted in the administrations of John F. Kennedy and Ronald Reagan to show that spurts of economic activity follow tax reductions.

The extent to which high taxes act as a brake on economic activity, however, has changed dramatically. The top marginal income tax rate in 1963, when Kennedy's cut was approved, was 91 percent. When Reagan proposed his reductions in 1981, the top tax rate was 70 percent for dividends and capital gains, and 50 percent for wage and salary income. The current top rate is 38.6 percent. The legislation approved Friday will lower that rate to 35 percent, and reduce the maximum tax rate on dividend and capital gains to 15 percent.

Unless tax-cut proponents are prepared to argue that a zero percent tax rate is the optimum, they must admit that the economic payoff of tax cuts begins to dwindle at some point. As the payoff shrinks, the economy's ability to generate more tax revenues at lower rates begins to falter, leading to larger deficits and a diminished ability to support public services ranging from highways to defense. The Bush administration and Congress are gambling that the nation hasn't already reached that point - and so far, the performance of the economy and the growth of the deficit suggest that the gamble is a losing one.

Of course, those who insist that tax cuts are the remedy for every economic ailment will have a ready explanation for economic stagnation and ballooning deficits: The tax cuts weren't big enough.